The Blockchain sector experienced a remarkable surge, increasing 14.7 billion in value to reach over 35 billion USD.
It’s notable that this is more than a third of the way to the fund’s prediction that the market cap would grow to 100 billion. As I mentioned in the original thesis statement.
By 2020 my assumption is this global market for distributed applications (money, data & content) will exceed the market cap of a single moderately sized internet company (~100b). Which implies 5x growth across next 3 years.
It’s my firm conviction that right now the market is simply “waking up” to this future.
Much of this growth in April was driven by Altcoins (everything except Bitcoin). The market capitalization of Altcoins experienced a record Surge in April: from 8 to 14 billion dollars.
Where is the new value coming from?
A variety of fundamental factors played a role in this month’s increase, here are the most notable highlights.
The holding in Ripple experienced the highest gain in April, up 335%.
Put simply Ripple is “Bitcoin for banks” – it’s designed to give banks the speed & efficiency of Bitcoin backed by a private network. It enables banks to send real-time international payments across networks in seconds instead of days. The payment network runs on a native coin (XRP) which trades across all currency pairs allowing rapid settlement. So as Ripple usage increases, as does the demand for XRP.
The big news in April was the adoption by 10 more banks bringing the total to 75 banks using Ripple as of this month. The reason they use it is simple: it saves them millions. The homepage makes this very clear:
So adoption of Ripple won’t involve any consumer facing component, it’s simply a backend solution to save Bank’s money and prevent fraud (which “could” lower prices for consumers).
It’s also important to note that Ripple is a private company based in the valley and one of the older players in this sector. They have been laying the groundwork for this vision for years. This is the very beginning of a new multi-billion dollar market and Ripple is poised to capture it. Currently it sits at a market cap of 1.9 billion and is third on the coin list.
Litecoin was the second highest gainer in the portfolio increasing 250% in the month of April. Litecoin is one of the oldest Altcoins, dating back to 2011. It was designed from day one to be the “Silver of Bitcoin” – no more, no less. It’s a simple alternative with slightly different features. It’s accepted by almost every exchange (soon to be added by Coinbase)
This “silver” narrative hasn’t traditionally excited investors – it sat around 0.5% the value of Bitcoin. However, there is currently a struggle in the Bitcoin community over how to update their code base to address scaling issues. One popular solution to address the scaling update is known as SegWit, which the Bitcoin network has yet to agree to adopt.
While this debate was going on in Bitcoin community, the Litecoin community rushed ahead and signaled to adopt SegWit. This critical update brought attention to Litecoin as the network demonstrated the ability to evolve without contentious hard forks. It also makes it a more attractive technology to experiment with. It’s also popular on exchanges because of it’s long history and acts as a safe haven during Bitcoin uncertainty. Practically speaking, it is also a “faster” coin than Bitcoin right now.
It’s value increased to approx. 1.5% the value of Bitcoin which is notable.
Long term I see Litecoin capturing ~5% of Bitcoin’s value – for both practical (it’s faster and technically superior) and psychological (long history, like silver) reasons.
Ether increased in value 60% this month. In the past 3 months ether has increased from 10 to 80 US dollars. It is now worth over 7 billion. The network effect seems to be kicking in as friends of friends spread the word and people digest the idea that Ethereum is staged to power “the decentralized internet” or “the new internet” (as HBO writers put it).
In simple terms, it’s an internet without centralized severs owned by a single actor (corruptible and prone to failure). Instead we have a large network of individual computers owned by different actors, coming to consensus via economic forces. More detail in previous letter.
Much of the attention on Ethereum right now is the latest applications being build on top of it…
Applications running on Ethereum
In the previous letter I mentioned the emerging applications which are built on top of Ethereum network resulting in new “application level tokens” (app coins). It’s important to note that app tokens are equivalent to owning a share of stock in the application itself. This is how you invest in a decentralized application – by owning the tokens that underiey an application, you get equity in the application.
Note: Because of the speculative nature of these technologies, they are treated as volatile stocks and limited to < 4% of the funds value.
Here is the summary of the most notable Ethereum app tokens we hold:
Golemn Network Token (GNT)
GNT increased 131% this month. Golem is designed to be the ‘world’s super computer’. Anyone with a computer can connect to this network and ‘rent’ their unused computing power for money. While anyone who needs super computing power can simply pay to use the Golemn network. This “super computing as a service” model will reduce the cost of super computing substantially as well as democratize access to it. Long term I have a bullish view of GNT.
Edgeless token (EDG)
EDG increased in value 144% this month. Edgeless is designed to be the first decentralized casino which will run on the Ethereum network. By holding these tokens you share in the casino’s profit. I hold a neutral view on EDG and so it remains a smaller holding in the fund. The gain is mainly due to participation in the initial coin offering.
Storj (storage) token (SJCX)
SJCX increased in value 117% this month. Storj is designed as a decentralized file storage network running on Ethereum. Along with Factom it’s one of our two file storage holdings. This technology allows anyone to rent computer space for money or buy secure storage from the cloud.
In the month of April Bitcoin increased in value approximately ~25%, reaching all time highs. Bitcoin is now worth over 22 billion.
It’s my belief that the Bitcoin network alone will soon be valued at 50 billion (that would mean Bitcoin priced at $3000 USD today) even if it continues to only support the most basic functions as a reserve currency.
The growth of our fund (326%) can be better understood when you realize we have two waves on top of each other (Bitcoin + Altcoins) and they are mutually beneficial. Almost all new investment flows in and out of this market through Bitcoin (since it acts as the reserve currency). New projects such as Ethereum attracts new investors to this sector, and creating new Bitcoin holders who might not have otherwise bought in.
This helps explain the fund’s growth curve from Jan 1st through April 29th 2017:
[Fund return Feb through April]
I believe we are experiencing a “gap up” where the tides shift sharply in a market due to new participants and positive realignment of consensus. Currently there is a wide knowledge gap to cross when investing in this sector – so adoption has been slow. However once people enter the sector they tend to become cheerleaders of this new economic and technological philosophy – it also happens to attract some of the brightest minds (and companies) in development today.
I’ve personally noticed this network effect is kicking in as friends of early adopters finally see this sector as the next great investment opportunity, rather than a ‘fringe currency’ for hackers and online drug trade.
Aside from multiple ETF proposals in the queue (for both Bitcoin and Ethereum) there are many blockchain investment funds being launched as of this very moment. Such as tass which just raised 8 million or Polychain which launched with 10 million a few months back. Over time we will see this network effect jump to the third and fourth level of ‘late adopters’ – and that growth is yet to come.
In my view we are nowhere near “mania” territory until the total market capitalization is closer to 100 billion (currently at ~37 billion). When this happens it will be time to adjust the Bitcoin ratio to 50% or more. Until that happens the portfolio will be structured as follows:
- ~30% Bitcoin
- ~20% Ethereum
- The other ~50% is divided up across the holdings based on certainty according to a simple rules-based tier structure. Each tier is limited to a certain percentage of the portfolio as follows:
- Tier 1: Established technologies, lower risk (limited to < 8% of total portfolio)
- Tier 2: Popular & Emerging technologies, moderate risk (limited to <4%)
- Tier 3: Emerging technologies, higher risk (limited to <3%)
- Tier 4: Lower certainty emerging technologies, higher risk (targeted for 1%)
- Tire 5: Long shots, higher risk (limited to <0.5%)
Based on this system we enter the month of May with the following breakdown:
At the end of the past month I closed with this:
Whether the massive gains from this month hold in April or not will help identify whether this past month was truly a rising tide, or a speculative splash. My overall stance is Bullish though I expect some bumps in the weeks ahead during the Bitcoin wars that are brewing.
It’s clear that it was indeed a tidal shift. The question is where the market settles once the waves caused by this tidal shift attenuate. Because there is so much excitement in this sector (due to new projects being launched), the concept of settling down doesn’t seem likely in the near term.